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What Is a SIMPLE IRA?

The SIMPLE IRA gives small businesses a low-maintenance way to offer a retirement plan for their employees. We outline how the arrangement works.

Sean Canonica
By Sean Canonica
Updated Jun 7, 2024
Sean Canonica

Sean Canonica

Senior Finance Writer

Sean is a finance writer and content strategist for ComparisonAdviser. He has over three years of experience writing about various topics, such as insurance, financial advisors, and investing. Additionally, he is a co-founder and the CEO of RateSonic, an online insurance resource. Sean values helping readers understand difficult topics by creating easy-to-read and thorough content.

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Planning for retirement is crucial to ensure a comfortable lifestyle once your career ends. One way to accomplish this is by saving and investing in a tax-advantaged account that your employer offers. For small businesses, large plans like a 401(k) or pension may not be feasible. However, many offer a SIMPLE IRA, which allows both employers and their employees to contribute toward their retirement.

In this article, we’ll explain how a SIMPLE IRA works, including how much you can contribute and what tax advantages it offers. You’ll also learn how this retirement plan differs from a traditional IRA. Finally, we’ll outline the pros and cons of relying on such an account for your post-working years.

Key Takeaways

  • SIMPLE IRAs allow small business owners and their employees to contribute toward their retirement relatively easily.
  • Only small businesses with no more than 100 employees with at least $5,000 in earnings may offer a SIMPLE IRA.
  • An employer must match at least 1% or a maximum of 3%.
  • As of 2024, employees may contribute $16,000 to their SIMPLE IRA.
  • Earnings within the SIMPLE IRA grow tax-deferred, much like a traditional IRA.

How SIMPLE IRAs Work

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a plan that enables small businesses and their employees to contribute funds for their retirement. The program allows employees to deduct a portion of their salary for contributions. Then, as the plan’s title suggests, employers may match deposits that their employees make up to a limit of 3% or, occasionally, 4%.

Unlike a pension plan, the employee has full ownership over the funds in their account. This also means they shoulder the responsibility and maintain the freedom to manage the funds in the account. This includes any investments they make.

For an employer to start a SIMPLE IRA program, it must:

  • Have no more than 100 employees with $5,000 or more in earnings during the preceding year.
  • Not already have a retirement plan in place.

Unlike larger retirement plans, such as 401(k)s or pensions, the SIMPLE IRA requires far less setup and administration for employers. This, coupled with the criteria above, makes it an attractive option for small businesses when it comes to offering a retirement plan.

Within the SIMPLE IRA, employees can invest in a wide variety of securities. This allows one to grow their savings through compound interest and positive returns over several years or decades. The following are types of assets that are often available to accountholders:

Contributions and earnings within the account are tax-deferred. With this arrangement, you’ll only pay taxes once you begin to withdraw funds from the account. As with the traditional and Roth IRA, you may take distributions penalty-free at age 59.5 (doing so earlier incurs a 10% penalty). Additionally, the IRS requires distributions once you reach age 73.

Contribution Limits

Contributions to SIMPLE IRAs are made by the employee as a deduction of their pay. Then, the employer may match up to 3% or 4%. However, the U.S. Internal Revenue Service (IRS) sets limits on how much one may put in each year.

As of 2024, the contribution limit was $16,000 ($15,500 in 2023, $14,000 in 2022, and $13,500 in 2021). In the case of an employee who contributes to several different retirement plans, the maximum amount that they may put in is $23,000 in 2024. For employees 50 and over, catch-up contributions of $3,500 may be made.

For an employee to qualify for a SIMPLE IRA, they must earn at least $5,000 in two prior calendar years. Additionally, they must reasonably expect to earn an additional $5,000 in the upcoming calendar year. In addition to employees, self-employed individuals may also contribute to the plan for themselves.

SIMPLE vs. Traditional IRA

The traditional IRA is a tax-advantaged retirement account that allows individuals to contribute a set amount of funds each year. Unlike a SIMPLE IRA, this arrangement is separate from your employer. This requires you to contribute personal funds to it each year to grow the account.

Beyond the contribution differences, the two accounts operate in the same capacity. Earnings and contributions grow tax-deferred, requiring you to pay taxes upon taking distributions. Within the account, both types allow you to invest in a wide variety of securities to assist with growing your initial deposits.

Pros and Cons

SIMPLE IRAs are an easy way for small-business owners to provide a retirement plan for their employees. And, on the employee side, the account is beneficial because it allows them to fully own the funds within the account, receive tax advantages, and invest for their future through a wide array of securities. However, there are limitations, especially when one compares it to other types of plans.

While SIMPLE IRAs grow tax-deferred, the accountholder must still pay taxes on distributions at their ordinary income bracket. Due to required minimum distributions (RMDs) that start at age 73, taxes become inevitable. Additionally, the SIMPLE IRA, while having a significant contribution limit, is much smaller than other plans, such as a 401(k) or SEP IRA.

Pros

  • The employer must match contributions.
  • You’re able to invest in various securities to grow your funds.
  • You have full ownership of the funds in the account.

Cons

  • You must pay ordinary income taxes on distributions.
  • RMDs start at age 73.
  • Smaller contribution limits than other plans, such as the SEP IRA, 401(k), or 457(b).

How to Open an Account

Unlike a traditional or Roth IRA, the business owner establishes the SIMPLE IRA plan and accounts for their employees. Then, the employee or the business owner can manage their account through the broker that was originally used to set the accounts up.

For a SIMPLE IRA, employers don’t need to file an annual Form 5500 return with the IRS. If a company meets the eligibility requirements, it may select a brokerage firm and establish a plan for its employees. Examples of prominent firms include:

  • Vanguard
  • Fidelity
  • Charles Schwab
  • T. Rowe Price
  • Merrill

Frequently Asked Questions

Are SIMPLE IRA contributions tax deductible?

Yes, contributions to your account are tax deductible. This, along with tax-deferred earnings, are the major tax advantages you receive from the SIMPLE IRA.

Can you roll a 401(k) into a SIMPLE IRA?

You may transfer funds from your 401(k), 457(b), or 403(b) to your SIMPLE IRA plan. This rule also allows you to roll money from your Roth or traditional IRA into your account as well. However, be aware that you must wait at least two years from the date that you entered the SIMPLE IRA plan to do so.

Can I keep my SIMPLE IRA after leaving my job?

The funds within your SIMPLE IRA are wholly owned by you. This means that, even if you leave your job, you retain ownership of the account. In this case, it’s common to roll the funds over to another type of retirement account or another SIMPLE IRA.

Can I have a SIMPLE IRA and a Roth IRA?

Even if you have a SIMPLE IRA through your employer, you may own and contribute to a Roth IRA.